DoD Panel Proposes Retirement Benefit Change for Troops

July 26, 2011 (PLANSPONSOR.com) - A sweeping new plan to overhaul the Pentagon’s retirement system would give some benefits to all troops and phase out the 20-year cliff vesting system.

The Military Times reports the plan calls for a corporate-style benefits program that would contribute money to troops’ retirement savings account rather than the promise of a future monthly pension, according to a new proposal from a Pentagon advisory board. All troops would receive the yearly retirement contributions, regardless of whether they stay for 20 years.

Those contributions might amount to about 16.5% of a member’s annual pay and would be deposited into a mandatory version of the Thrift Savings Plan, the military’s existing 401(k)-style account that now does not include government matching contributions, the news report said. A new feature would adjust those contributions to give more money to troops who deploy frequently, accept hardship assignments or serve in high-demand jobs. It would also give the services a new lever to incentivize some troops to leave or stay on active duty longer.

The proposal would require approval from Congress.

According to the Military Times, unlike other proposals to overhaul military retirement that would grandfather current troops, the board suggests that DoD could make an “immediate” transition to the new system, which would affect current troops quite differently depending on their years of service:

Recruits. The newest troops out of boot camp after the proposed change would have no direct incentive to stay for 20 years and would not get a fixed-benefit pension. Instead, they would receive annual contributions to a Thrift Savings Plan account and could leave service with that money at any time — although under current rules, they can’t withdraw the money until age 59½ without paying a penalty, except in certain specified circumstances.

Five years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service until the “old vesting date” — the 20-year mark — they also would get one-fourth of the “old plan benefit,” or about 12% of their pay at retirement, as an annuity. If they separated, for example, after 10 years, they would walk away with no fixed-pension benefit but would have a TSP account with five years of contributions.

10 years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service for 10 more years, they would receive half of the “old plan benefit,” about 25% of their pay at retirement, as an annuity. If they separated after 15 years, they would walk away with no fixed-pension benefit but would have a TSP account with five years of contributions.

15 years of service. Troops would immediately begin accruing new benefits in a TSP account. If they remained in service for five more years, they would receive three-fourths of the “old plan benefit,” about 37.5% of their pay at retirement, as an annuity.

20 years and beyond. Troops who stayed in past 20 years would continue to receive annual TSP contributions.